free cash flow
The cash a company generates after accounting for capital expenditures needed to maintain or expand operations — the true discretionary cash available.
Example
“Despite high reported profits, the company had low free cash flow because it was spending heavily on new factories.”
Memory Tip
Free cash flow = cash that's FREE to use — after paying for the business itself.
Why It Matters
Free cash flow reveals whether a company can actually afford to pay dividends, buy back stock, or invest in growth without borrowing more money. For investors, it is more reliable than reported earnings because it shows real money moving in and out, helping you understand if a business is truly profitable and sustainable.
Common Misconception
Many people confuse free cash flow with net income or profit. A company can show high earnings on paper but have negative free cash flow if it spends heavily on equipment and facilities. Conversely, a company might have low profits but strong free cash flow if it has minimal capital spending needs.
In Practice
A software company reports 10 million dollars in annual profit but spends 8 million dollars on new servers and infrastructure. Its free cash flow is only 2 million dollars, meaning it has just 2 million dollars available for dividends or debt repayment. A manufacturing company reports 5 million dollars in profit but spends only 1 million dollars on equipment, giving it 4 million dollars in free cash flow and more flexibility for shareholders.
Etymology
Cash 'free' (available) after necessary spending.
Common Misspellings
Small business accounting made simple
Related Terms
More in accounting
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See Also
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